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EU Commission sets EUR100m threshold for regulation of alternative investment managers

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The European Commission has published its proposed Directive on Alternative Investment Fund Managers, which aims to create a comprehensive and effective regulatory and supervisory framewor

The European Commission has published its proposed Directive on Alternative Investment Fund Managers, which aims to create a comprehensive and effective regulatory and supervisory framework for alternative investment managers in the European Union. The proposal now passes to the European Parliament and Council for enactment.

The directive covers managers of hedge funds and private equity funds, which managed an estimated EUR2trn in assets at the end of last year, according to the Commission, which says the legislation represents the first attempt in any jurisdiction to create a comprehensive framework for direct regulation and supervision in the alternative fund industry.

‘Alternative investment fund managers have become important participants in the European financial system and their activities have had a significant impact on the markets and companies in which they invest,’ says Charlie McCreevy (pictured), the commissioner responsible for the internal market and services.

‘There is now a global consensus – as expressed by the G20 leaders – over the need for closer regulatory engagement with this sector. In particular, it is essential that regulators have the information and tools necessary to conduct effective macro-prudential oversight.

|The crisis has also underscored the importance of robust risk and liquidity management systems and the need for reliable investor information as the basis for effective due diligence. I look forward to working with the European Parliament and Council to secure the adoption of this important piece of legislation.’

The proposed directive will require all alternative investment fund managers within its scope to be authorised and to be subject to harmonised regulatory standards on an ongoing basis. It will also enhance the transparency of the activities of alternative managers and the funds they manage towards investors and public authorities.

The Commission says this will enable member states to improve macro-prudential oversight of the sector and to take co-ordinated action as necessary to ensure the proper functioning of financial markets, as well as helping to overcome gaps and inconsistencies in existing regulatory frameworks at national level and providing a secure basis for the development of the internal market.

It says the directive is designed to ensure that no significant alternative manager escapes effective regulation and oversight, while recognising the legitimate differences in existing business models and providing exemptions for smaller managers for whom the requirements would be disproportionate.

It will apply only to managers with a portfolio of more than EUR100, with a higher threshold of EUR500m for managers not using leverage and having a five-year lock-in period for their investors, who are not regarded as posing systemic risks.

The commission says the EUR100m threshold would cover roughly 30 per cent of hedge fund managers, managing almost 90 per cent of assets of EU-domiciled hedge funds, although it is estimated that a large majority of assets run by EU-based managers are in funds domiciled outside the EU.

The directive is intended to regulate all major sources of risks in the alternative investment value chain by ensuring that managers are authorised and subject to ongoing regulation and that key service providers, including depositaries and administrators, are subject to robust regulatory standards.

The legislation also seeks to enhance the transparency of alternative managers and the funds they manage towards supervisors, investors and other key stakeholders, and ensure that all regulated entities are subject to appropriate governance standards and have robust systems in place for the management of risks, liquidity and conflicts of interest.

The directive would allow alternative managers to market funds to professional investors throughout the EU subject to compliance with demanding regulatory standards, and would grant access to the EU market to third country funds after a transitional period of three years.

The delay is designed to allow the EU to check whether equivalence of regulatory and supervisory standards and exchange of information on tax matters are assured in the countries where the funds are domiciled.

The Commission defines alternative investment funds as those funds that are not harmonised under the Ucits directives, including hedge funds, private equity funds, commodity funds, real estate funds and infrastructure funds, and that mostly restrict to professional or institutional investors.

It says alternative fund managers are currently regulated by a combination of member states’ financial and company law regulation, as well as cross-cutting provisions of EU law, supplemented in some sectors by industry-developed standards.

However, the Commission claims recent events have demonstrated that the activities of alternative managers are not sufficiently transparent and that the associated risks are not sufficiently addressed by current regulatory and supervisory arrangements.

It also says the existing regulatory environment does not adequately reflect the cross-border nature of the risks posed. and that the impact of risks crystallising in the alternative investment sector in one member state will therefore be felt beyond its national borders.

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